The landscape for income investors has increasingly become volatile. However, there are still pockets of the market that are offering stable and often growing income for ESG investors who are willing to cast their net wider to ensure a more diversified income stream, allowing them to deliver on their financial commitments while maintaining their principles.
Healthcare: Yield and growth
One such pocket is the healthcare industry, which is naturally aligned to the values of many ESG investors, playing a vital role in expanding access to medicine and delivering affordable healthcare.
The healthcare industry is often viewed as homogenous by many investors, but the breadth and depth offered at a sector level is second to none. The diverse industry includes well-established global companies operating in the research and development (R&D), life sciences, insurance, biotechnology, diagnostics, drug distribution, medical technology and animal health, all of which provide rich opportunities for income investors. Although the large-cap R&D pharmaceutical giants are widely held in ESG and mainstream income portfolios, there are many candidates in the other sectors offering income investors both yield and growth.
The industry does pose concerns for ESG investors including questionable sales and marketing practices, Medicare fraud, poor manufacturing practices, bribery and failure to disclose safety data. However, the pandemic has provided an excellent opportunity to improve the reputation of healthcare and a new generation of CEOs has emerged in recent years, who are focused on delivering access to medicine and affordable healthcare. The industry is entering an exciting phase with the increased adoption of technology, which will act as a disruptor leading to greater innovation and wider societal benefits.
Financials: Monetary tailwinds
The sharp change in monetary policy has brought financials, especially banks, into the fold for income investors. Banks and other financials accounted for almost two-fifths of the increase in UK dividends in the second quarter (year-on-year basis). The insurance sector will be a beneficiary of rising interest rates and yields are in excess of 5%, with some quality names offering closer to 8-9% yields. The shift in monetary policy is also a positive for financial services and investment managers. There is a large amount of excess capital in the banking system, which augurs well for not only income payouts, but also share buyback programmes.
Renewables: Inflation protection
The renewables sector has come into its own over the past few years, with investors offered high yields – in excess of 5% paid quarterly, asset backed and offering an inflation kicker. The defensive attribute of the sector is a strong tailwind. The sheer number of investment vehicles that have launched also offers greater diversification in a sector that was previously dominated by a few well-established names.
Technology: Not the FAANGs
The technology sector’s stellar performance to the end of 2021 was driven by the performance of the FAANGs (Facebook, Apple, Amazon, Netflix and Google). These titans have offered very little in terms of income for investors. However, the wider sector contains several relatively mature names in software, hardware and semiconductors, which have become income stalwarts and, in turn, become a core part of ESG income portfolios. These businesses have fewer ESG concerns – privacy, weak governance, data misuse, conflict minerals and poor labour relations – than the FAANGs.
Although the level of yield is lower in the technology sector, the dividend growth is attractive for long-term investors. Sub-sectors that are attractive include semi-conductor manufacturers and communications equipment. Yields range from 3% and upwards and investors have been seeing double-digit increases in payouts over three and five years.
